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November 16, 2011

FT: China - Entrepreneurship

China searches for the next Steve Jobs

By Kathrin Hille in Beijing

When Dave McClure, a venture capital investor from Silicon Valley, spoke at an internet entrepreneurs’ club in China last week, he had a lot of praise for his hosts.

“Chinese entrepreneurs are most likely smarter and more aggressive than [those] in the US,” he told the audience. “Beijing is one of the few places in the world where the pace of innovation is faster than in Silicon Valley.”

But in China, the recent mood has been more sober. The death of Apple founder Steve Jobs this month triggered rounds of soul-searching over why the country lacks technology entrepreneurs as successful as Mr Jobs or Mark Zuckerberg of Facebook, who came up with products that changed the world.

“Chinese companies can be expected to have market valuations and business models like Apple’s within ten years but it is difficult to expect any type of Apple-like innovation,” says Lee Kaifu, the former head of Google China who, with his incubator Innovation Works, has become a guru for internet start-ups in China.

Although the number of Chinese internet users – now at 500m – has overtaken the population of the European Union and that growth keeps hatching new internet ventures everyday, most of these copy ideas from the US.

To name the best-known examples, Baidu, China’s largest search engine by revenue, is a copy of Google, while RenRen, China’s largest real-name social network, was modelled on Facebook. China is estimated to have as many as 5,000 clones of Groupon, the US daily deals site.

That is not because the founders lack creativity, they themselves argue. “The reason you set up a business is that you want to solve a certain problem or need you see around you,” says Gong Yu, a veteran internet entrepreneur and chief executive of Qiyi, the internet video site owned by Baidu.

“But China’s internet is just so many years behind that of the US, so internet entrepreneurs in the US will inevitably encounter many problems and needs first.”

Many Chinese web business founders agree. “It’s not about being smart but about being there first, just like gathering mushrooms,” says Wang Xing, founder and chief executive of Meituan, one of China’s first Groupon copies and the country’s most prolific internet business closer.

Mr Wang has been billed “the Mark Zuckerberg of China”, mainly because he followed Facebook, founded in 2004, with what is now RenRen, a similar site launched in 2005 as Xiaonei, or On Campus. Less than a year later, he sold that business for less than $4m to Oak Pacific Interactive, the company which took it public this year. RenRen is now valued at $2.25bn.

“I studied computer networks, therefore I have an understanding for social networks, it’s the same pattern,” he says. But when he made that connection, Friendster and Facebook were already there.

Mr Wang is not apologetic. He believes that Chinese consumers are not yet mature enough in terms of income and tastes to need revolutionary new internet products.

“When consumption develops, there are three phases,” he says. “The first is focused on quantity, providing enough to meet demand, the second on securing product quality, and only during the third will people start developing tastes. On the internet in China, we’re still very much in the second phase.”

Experts observe that, given China’s vast market, it is natural to exploit easy business opportunities first. “In the US, entrepreneurs have to be innovative to find market opportunity,” says Mr McClure. “If you live in a country with a population of 1.3bn and you see an idea that works, it would be foolish not to copy.”

This extremely pragmatic mindset is a common trait among most Chinese internet entrepreneurs. “Many start-up founders in the US start out with a technological idea they want to realise, and don’t worry about money until much later,” says Chen Tao, a partner for China at Roland Berger Strategy Consultants.

The biographies of many Chinese internet entrepreneurs reflect this more conservative outlook. Very few are university dropouts like many of their US counterparts. Most have much more industry experience before they start their own business than their American peers.

Robin Li worked as a software engineer for a division of Dow Jones and for Infoseek, an early US web search engine, before setting up Baidu in 2000. Jack Ma lectured at university on international trade and headed an IT company set up by a unit of the foreign trade ministry before he founded Alibaba, China’s largest e-commerce company by revenue, users and transaction value in 1999.

At Qiyi, Mr Gong’s background is similar. “Although I knew already in university that I very much wanted to set up a business, I didn’t feel ready,” he recalls. So he first went to work as a software development and maintenance engineer at Itochu, the Japanese trading company, and later helped set up the China unit for a company founded by a friend in the US before he dared to start his first own venture, the online portal focus.cn.

“On the first day, the office was completely empty – it was just me,” he says, recalling how unfamiliar and slightly fearful he felt.

There was no long tradition of entrepreneurship in the People’s Republic of China when the country’s first internet companies were set up. Capitalism was new, and the internet even newer. The resulting caution can be seen among the investors who back the sector, as well as its entrepreneurs.

Lei Jun, China’s most prominent homegrown angel investor, only backs the companies of friends or friends of friends, and prefers serial entrepreneurs because the chances of success increase over time. Mr Lei has invested in less than 20 companies such as Vancl, an online clothing retailer, and Keniu, a security software maker.

But foreign venture capitalists and stock market investors, a far larger source of funding for Chinese technology start-ups, follow similar principles. The rise of the thousands of Groupon clones in China has been fuelled by a wave of venture capital money from the US.

Copying remains but that will change

By Kathrin Hille in Beijing

If there is anything Chinese internet users are as passionate about as stealing cabbages in social games such as Happy Farm, it is the debate about who came up with the idea for such games in the first place.

“It was not [US company] Zynga who invented farm games – those were around in China first,” says Li Shanyou, the founder of Ku6, one of China’s leading internet video sites, who now heads the centre for entrepreneurship and investment at China Europe International Business School in Shanghai.

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Although the incessant cloning of foreign internet sites such as Facebook, Twitter or Groupon in China have given Chinese entrepreneurs a bad name as mere copycats, there are cases where China was early or first in developing certain internet products or business models.

Farming games are the most-cited example because 5 Minutes, a Chinese game company, completed development of Happy Farm in May 2008, well before the start of Farmville, Zynga’s equivalent in the US.

But there are several other cases where Chinese internet entrepreneurs did not follow a US lead.

Sina Weibo, China’s leading microblogging site which was seen as a Twitter clone when it started, has now transformed into a service combining a microblog and a social network. It has many features Twitter does not have, for example allowing users to watch videos inside a post.

Baidu, China’s largest search engine by revenues, pioneered Tieba, a social network where people can form discussion groups based on search queries they have in common.

Tencent, the company that operates QQ, the world’s largest instant messaging service, came up with QQ Groups, a service that allows users to form message groups, something that did not exist in the west at the time. Taobao, China’s largest consumer e-commerce company, set up an instant messaging service before Ebay acquired such capabilities by buying Skype in 2005.

But none of these have created a stir beyond China’s borders on the scale of Facebook or Twitter – mainly because the innovations were not as far-reaching or disruptive.

“Chinese internet entrepreneurs are particularly strong in micro-innovation – tweaking existing models to fit the needs and habits of consumers in this market,” says Mr Li.

Industry experts believe that will not change until China’s internet has become much more mature. “I think there will be a window of at least another ten years for building internet businesses based on ideas copied from the US ,” says Gong Yu, chief executive of Qiyi, the online video site owned by Baidu.

Chinese executives believe the area most likely to spawn major innovation will be the mobile internet because Chinese web users are going mobile much earlier than their American counterparts. Says Mr Gong: “If anywhere, this is where China will come up with something really different.”